Policy Extensions Will Test Congressional Resolve on New Pay-As-You-Go Law

A key test of the new pay-as-you-go (PAYGO) law is taking shape as Congress considers how, or whether, to pay for the extension of major tax and spending policies. In recent years, the list of expiring policies has grown as Congress has adjusted the expiration dates of legislation to comply with budget rules and limit the recognized costs.

This week the House may take up a small portion of these policy extensions. The details have not been announced but two things are certain: 1) the package will not be fully paid for and; 2) more expensive extensions are yet to come.

Among the policies likely to be included in the House bill (H.R 4213) are extension of several expired tax breaks such as the credit for research and experimentation, and deductions for state and local taxes. Over ten years, this group of “extenders” would cost roughly $30 billion.

Because extension of these policies must be deficit-neutral under the PAYGO law, one thing to watch for is whether the bill also includes sufficient credible offsets. The alternative, which should be avoided, would be to declare them “emergencies” and thus exempt from PAYGO.

Two other policies that may be included are extended unemployment compensation and health care insurance assistance for workers who have recently lost their jobs (COBRA). The emergency exemption from PAYGO is likely to be invoked for these. If so, the cost will add to the deficit.

Lawmakers are also considering an adjustment to scheduled cuts in Medicare reimbursements for physicians. The PAYGO law granted this policy a five-year exemption at an estimated cost of $88.5 billion. However, any further extension of this “doc fix” requires PAYGO offsets.

Other policies that have been proposed could push the total cost of the “extenders” legislation toward the $200 billion mark, with most of it exempt from PAYGO either because of an explicit provision in the law or through use of the emergency designation. The resulting sticker shock is causing some justifiable concern in the face of deficits that are already unsustainable.

These are merely temporary extensions; the most expensive extensions are yet to come. Waiting in the wings is the planned extension of the 2001 and 2003 tax cuts for middle class taxpayers, at an estimated cost of $2 trillion over 10 years. This entire sum has been exempted from PAYGO by law.

Associated with this is the cost of providing continued relief from the Alternative Minimum Tax (AMT) and consideration of various ways to reduce the scheduled estate tax revival in 2011 to its level before the 2001 tax cut ($1 million exemption; 55 percent rate). While both were granted PAYGO exemptions through 2011, it will require hundreds of billions in offsets to extend them further.

It seems extremely unlikely that the full cost of policy extensions can be paid for entirely through traditional “loophole closings” and efficiencies. At some point very soon, Congress must confront the fact that it has promised more than it is willing to pay for. The new PAYGO law, even with its generous exemptions, will help to clarify the need for trade-offs. Whether through the President’s fiscal commission or the routine budget process, fundamental adjustments in tax and spending policies must be made.